“Market Urbanism” refers to the synthesis of classical liberal economics and ethics (market), with an appreciation of the urban way of life and its benefits to society (urbanism). We advocate for the emergence of bottom up solutions to urban issues, as opposed to ones imposed from the top down.

Supply and Demand: A Response to 48hills

In a recent piece published by 48hills, former Berkeley planning commissioner Zelda Bronstein takes aim at…well…too many things for me to succinctly recount in detail. So instead of attempting to respond to every single argument littered throughout her 7,000 word article, I’ll focus on the big stuff.

Supply and demand: it’s a thing…we promise

Ms. Bronstein asserts that supply and demand is, in fact, not a thing. Or at least if it is, it doesn’t apply to the Bay Area housing market. She writes that in California generally and the San Francisco Bay Area specifically,

I’m unsure why Ms. Bronstein thinks the laws of supply and demand (ceteris paribus) don’t work here, but they’ve certainly been in force in Tokyo. Japan’s capital has seen sustained population growth as well as productivity increases over the last couple decades. And after twenty years of allowing housing to be built when and where people demand it, prices have remained gloriously flat. Just as expected.

And when we look at American cities with the most supply elastic housing markets, we see a strong relationship between the ease with which new market rate construction can be developed and lower price increases overall. Unsurprisingly, San Francisco has one of the least elastic housing markets in the country and has experienced some of the most extreme percentage increases in housing prices as a result.

No matter what example we look at or how we cut up the data, there’s nothing out there to contradict the basic YIMBY story about supply, demand, and price. Unless, of course, you don’t actually understand the story, which may be the problem in Ms. Bronstein’s case. For her benefit, I’ll restate the general position.

More supply equals lower prices (in the aggregate and over time)

The pro-supply position is that if we allow supply to chase demand across the entire Bay Area housing market, we’ll get lower prices in the aggregate and in the long run than would otherwise have been the case. Properly understood, this should not be a controversial statement. But let’s flesh out a few of the details and qualifications below.

…

Prices across an entire regional housing market might still be subject to short run increases, even in a supply friendly regulatory regime.

When demand for housing kicks up (because more people begin looking for housing, or the people that are already here have more money, or both) prices begin to rise

As prices begin to rise, developers* begin to create additional supply as well

Only after supply comes online (which involves significant lag time in housing markets) is there any impact on price

This means price signals are more of a trailing indicator for producers in housing markets than in other contexts

Which further means that supply will always lag behind demand in a hot market…

But that supply can also dramatically overshoot demand in a sudden downturn, providing consumers with a glut of housing at reduced prices

Prices in every subsection of the Bay Area won’t necessarily decrease in real terms, even over the long run

Certain blocks or neighborhoods may only become more expensive over time

More housing would mean they’d be less expensive than would have otherwise been the case, but prices can still go up if space in a particular neighborhood comes into high demand

It increases the cost of market rate construction, bifurcating the housing market

It’s also woefully unscalable

And if you increase the percentage mandate past a certain point, projects cease to pencil and nothing actually gets built

Housing vouchers (if not a straight up basic minimum income) funded via a land value tax, would be a far more effective policy for stabilizing the least well off

No one in the pro-growth camp is claiming that reducing supply constraints will bring Jesus back early or cover the earth in gumdrops and candy canes. We’re identifying the housing crisis as a problem of excessively high aggregate housing prices and offering a solution based on a widely accepted** and empirically substantiatable interpretation of the facts which suggest the more the housing supply expands, the lower prices will be (compared to what would have otherwise been the case).

If Ms. Bronstein wants to agree with that interpretation but cite concerns other than region-wide affordability, we could perhaps have an honest discussion about what our housing problems are and what solutions we ought to pursue. But Ms. Bronstein claims to care about housing prices per se and refuses to accept the basic relationship between supply, demand, and price. As such, I’ll respectfully ask her to defend her position in the comments below or address these criticisms at length should she feel a more thorough response to be appropriate.

*This doesn’t necessarily mean developers in any strict sense. It could include homeowners installing an ADU on their property or anyone else willing and able to produce additional housing for others.

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About Jeff Fong

Jeff graduated from San Jose State University in 2011 where he studied Politics and Economics. For the last three years he's worked in startups focused on urban logistics and has become increasingly interested in urban economics as well as transportation policy. In 2016, Jeff co-founded Tech for Housing, a policy advocacy organization dedicated to mobilizing Bay Area tech workers on housing and transit issues.

Wanderer

Let’s try some of the real and rational elements of the discussion and get your take. Very long comment follows:
1. Globally wealthy buyers–Some portion of the housing price runup here (nobody knows how much) is caused by globally wealthy buyers. This is presumably most prevalent in San Francisco. In general, more supply doesn’t create more demand. But for these folks, more supply might create more demand, because the purchase is discretionary (the San Francisco place is not their principal residence) and because they are demanding about the kind of units the buy. As a side note, this pattern creates big ghost buildings with few actual residents, which is bad for the city.

2. Pent up demand for household formation–There are a lot of people in the Bay Area who are living with more people than they want to. If prices and rents (probably especially rents) fell or even stabilized, many of these people would move into their unit. That would be good for their quality of life (presumably) and for the construction industry. But by creating new households–new demand for housing–it would brake and blunt the impact of new supply.

3. Pent up demand for more central locations–There are people who are living on the fringes of the region who would, quite reasonably, live in more central locations. They could have shorter commutes, maybe even use transit or walk to work. Again, if this happened, it would improve the renters’ quality of life and bring actual residents to San Francisco or Oakland or Palo Alto. But it would again mean continued price/rent pressure in the central areas.

4. Quality of units probably has a similar dynamic, especially since there people now living in garages, in RVs, and other substandard housing.

5. There might be some impact from people within the region buying pied a terres (affluent family from, say, Danville, has a little place in San Francisco, but I don’t know how important this is. Probably more important are units that companies take off the market for their workers or visitors.

6. Then there are the units that Airbnb and its ilk take off the market. Airbnb has been engaging in the usual techlibertarian “we don’t know no stinking rules” response. Maybe you could mobilize tech workers to get Airbnb to work with rather than against cities.

Finally, bring enough units into the market depends on what I call “infinitely stupid bankers.” The bankers have to keep on financing units even after they stop making money. Bankers are known for their manic-depressive lending practices (turn on the tap, turn off the tap) but this still seems questionable.

In economic theory, land prices should fall in this scenario, to keep the buildings profitable. In California reality, land prices are very “sticky.” Property owners “know” what their land is worth and they don’t want to sell it for less. And under Prop. 13 they are under no pressure to sell, because taxes on long held land are low. It’s time for property taxes based on land value, but I’m not holding my breath.

None of this is to say that the Bay Area–especially its employment centers–do need more housing. When modest bungalows routinely sell for over $1 million, there’s a problem. One would hope that at this point everybody could acknowledge that. Given the nature of the U.S. housing market (unlike many other countries) there will need to be more market rate housing.

But it does mean that just repeating Build More Housing Build More Housing is not an adequate response. A new unit coming on that costs $1 million or $2 million will not cause filtration of units all the way down the poor. Something will break that chain–a new external buyer, pent up demand. Small new units–such as so-called microhousing–are a little better for filtration. I cannot understand why people who call themselves progressive in opposing luxury housing, oppose small units. But they don’t help larger households, like families with children.

What’s most needed is more social housing and lots of it, coming in at rent levels from “extremely low” to “workforce.” This is housing owned by public agencies, non-profit developers, and cooperatives. Social housing would create new supply for the people in worst trouble in the housing market. It would open up filtration at the bottom of the market, not the top, and put pressure on owners of low quality units to improve them. This is what happened when San Diego supported the new construction of residential hotels. Of course new social housing needs to come in all sizes. To make this real requires more public money (sorry libertarians), new legal tools, and a new political willingness to say no to well-housed NIMBYs.

1. Demand is not infinite.
2. No one is saying extra supply will cut real prices in half or anything. We understand that moving the supply curve makes it intersect at a different spot on the demand curve.
3a. Tokyo’s experience of holding prices flat while adding people/increasing productivity (effective demand = population x per capita wealth) is what we’re shooting for.
3b. If we did nothing other then hold prices flat or significantly reduce the rate of increase relative to population growth/productivity gains…that’s what we want.
3c. So again, not about nominal prices, and only kind of about real prices. Best way to think about it is how widely affordable is housing to how many people and that’s a measure of real prices versus real wealth (maybe real income, but we can quibble over that another time).
4. Allowing supply to increase doesn’t just mean allowing top of market high rise construction; it means ADUs, it means row houses and other sub 5 story wood frame construction–the ‘missing middle’ development– where prices justify more than single family detached, but not steel frame. But we have to allow markets the flexibility to do that now otherwise the entire region looks like Palo Alto.
5. I’m personally not against subsidies (as stated in the article), properly funded and administered, but ‘social housing’ in any form is not a solution to the problem as I see it. If, however, he goal of policy is to give some people a place to live and not others, fine, replicate Singapore. But that’s a nativist policy and one that’s not actually implementable unless you’re a sovereign capable of setting immigration controls.

Peter Nunns

“What’s most needed is more social housing and lots of it, coming in at
rent levels from “extremely low” to “workforce.” This is housing owned
by public agencies, non-profit developers, and cooperatives.”

Wanderer: by saying this, you’re *agreeing* with the idea that building lots more housing is the ideal solution to unaffordably high house prices. You’re proposing a different delivery model for said housing, of course, but the underlying philosophy is pretty much the same.

There are benefits to increasing the supply of social housing. But social housing is unlikely to meet the majority of demands. In most countries, it accounts for less than 10% of new builds. Using social housing as a substitute for private-sector construction would entail a drastic, possibly unprecedented shift in housing development.